Categories: Precious Metals
Topics: General Precious Metals

Silver: The Wind Beneath its Wings

A year ago, Silver was in the midst of a severe price correction, one precipitated by the global credit crisis and the massive rush toward liquidation of commodity futures contracts – at any price – that ensued. Silver plunged from nearly $21.00 all the way down to the sub-$9.00 range, causing many commodity investors to doubt that the Silver bull market had any chance of ever attaining such lofty prices again. Well, those doubts have all but been erased, and the technicals depicted on the following chart should be enough to convince all but the most hardened skeptics that Silver is alive, well and quite possibly enmeshed in what could be its most powerful bull market to date.

Silver SLV ETF Trading Analysis

Graphic credit: Metastock v.11

One of the first duties of any competent technical analyst is to determine the prevailing trend of a given stock or commodity, and one of the most effective ways to accomplish that is to look at the relationship of prices to a variety of key moving averages. On the chart above, pay special attention to the red and blue curved lines, which denote the 50 and 200-day exponential moving averages (EMA’s) for SLV, the exchange-traded fund that closely tracks the price of cash Silver. On the left side of the chart, witness the green oval, the location of a bullish ‘Golden Cross’ of the 50-period EMA above the 200-day EMA. For technical analysts and traders, this normally implies the likelihood of significantly higher prices to come. It’s not a ‘fail-safe’ technical indicator, but it does a pretty good job of forecasting the future trend of prices across many different markets. Currently, SLV is obliging with a period of sustained follow-through, despite having endured a sharp sell-off in the wake of the recent 50/200 Golden Cross.

As important as the Golden Cross is, it’s equally important that the moving averages confirm the trending moves by starting to slope upward; in this case, both the 50-day EMA and the 200-day EMA are both accelerating higher even as the spread between them is continuing to increase. Pro traders also know that both the 50 and 200-day EMA’s will frequently acts as strong support on pullbacks (especially when such EMA’s are flat or sloping upward), often providing relatively safe ‘re-entry’ points for experienced traders and investors. See the various colored ovals for a few examples of this phenomenon.

Technicians also have another reliable way to determine if SLV is indeed in a strong trend; plotted at the lower portion of the chart is the Aroon (14) trend intensity indicator. Similar in concept to the more widely used Average Directional Indicator (ADX), this indicator attempts to measure the power that underlies any given trending move. In the chart above, we see that every time that the blue Aroon (14) line crossed the red line that a meaningful trend move took place in SLV. While no one can be sure how far this particular move will go, if past Aroon (14) crossovers are any indication, SLV may yet have some room to move higher. SLV’s weekly chart has already moved into a similarly bullish Aroon (14) posture, which may be another clue that SLV (and cash Silver) may yet be destined to meet and possibly exceed the significant highs made in March 2008.

The Silver market also has some amazing fundamental factors going for it that are unique among all freely-traded commodities, and these factors also bode favorably for substantially higher Silver prices in the months and years to come:

• A long-term supply-demand imbalance in this critical industrial metal.
• The worlds’ largest short futures contract position in any major commodity.
• Possible repayment issues with ‘leased’ Silver and unbacked ‘Silver Certificates.’

There’s more, so much more to the Silver story, but savvy traders and investors are beginning to take notice – from early 2003 until early 2008, Silver increased in price by a factor of nearly five times, and the long-term fundamentals also seem to imply that far greater increases may yet lie just over the horizon. As we make the transition to a new decade, make sure that you seek wise guidance in the Silver market, as it could prove to be a very, very attractive market in which to deploy a portion of your trading and investment funds.